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Three Psychological Stumbling Blocks That Kill Profits
Face it, the past 12 years have been horrible for most investors.
This is not necessarily because the markets have been rocky, but rather because the vast majority of investors are hardwired to do three things that kill returns.
You can blame Washington, the European Union, debt, high unemployment, or half a dozen other factors if you want to, but ultimately, the person responsible is the same one staring back at you from your bathroom mirror in the morning.
That's why understanding the bad habits you didn't know you had can be one of the quickest ways to improve your financial wealth.
Here's what I mean.
Dalbar, a Boston-based market research firm, produces annual research that compares the returns of stock and bond markets with those of individual investors. The latest, covering the 20-year period ended last year, shows that the Standard & Poor's 500 Index returned an annualized gain of 9.1%. That stands in sharp contrast with the measly 3.8% gain individual investors averaged over the same timeframe.
Fixed income investors didn't do any better. According to the Dalbar data, t hey gained a mere 1% a year versus an annualized return of 6.9% for the Barclay's Aggregate Bond Index.
In other words, investors' self-defeating decisions contributed to an underperformance that was 58% below what it could have been for stocks and 85.5% below what it could have been for bonds.
Three reasons: recency bias, herd behavior, and fear.
It's All About Perspective
Recency bias is what happens when short-term focus trumps long-term planning and execution.
It's what happens when somebody yells "fire" and everybody runs for the same exit at once despite having entered through any of half a dozen doors in the auditorium. Simply put, recency is recent knowledge that overrides longer-term thinking and memory.
This is why momentum trading works, for example, or the news channels seem to cover the same stocks at nearly the same time – because a huge number of people are focused on exactly the same companies simultaneously. Logically, they then become the subject of increased attention and tend to move more strongly or consistently.
The question of why is the subject of much debate among human behaviorists, but I chalk it up to the fact that human memories tend to focus on recent events more emotionally than they do longer-term plans that are put together with almost clinical detachment.
And the more extreme the events or the news, the sharper our short-term focus becomes.
That's why, according to "Mood Matters," a book by Dr. John Casti, one of the world's leading thinkers on the science of complexity, "bombshell events are assimilated almost immediately into the prevailing [social] mood" where as longer-term cycles bear almost no witness to gradual change.
If that doesn't make sense, think about what happened on 9/11. Most of the world's major markets bottomed within minutes of each other on short-term panic and emotion. Then, when trading resumed days later, they began to climb almost in sync as highly localized events once again faded into the longer-term fabric of our world.
And that brings me to herding.
The Herd Mentality
We'd rather be wrong in a group than right individually so the vast majority of investors tend to make decisions, and mistakes, together en masse.
Five Stocks That Will Thrive After the Solar Energy Industry Shakeout
With as much as two-thirds of the struggling solar energy industry expected to either fail or be acquired over the next three years, the table will be set for the survivors to capitalize on a market with enormous growth potential.
Solar companies have struggled to keep their heads above water as the price for solar panels has fallen as much as 40%. The average operating margin in the solar energy industry plummeted to 0.1% in the third quarter from 13.7% a year earlier.
The stocks have been pummeled, as a result. The Claymore/MAC Global Solar Index (NYSEARCA: TAN) exchange-traded fund (ETF) is down 58% this year and the Market Vectors Solar Energy (NYSEARCA: KWT) ETF is down more than 60%. Several individual solar stocks have lost more than 70%.
"It's just a really difficult time," Morningstar Inc. (NYSE: MORN) alternative energy analyst Stephen Simko told The Globe and Mail. "The profitability of the industry has collapsed… Unless more bankruptcies happen and more production is shut down, this is a problem that is going to persist."
Few Will Be Left Standing
The tremendous pressure on margins has most people both outside and inside the solar energy industry predicting massive consolidation.
"This is the decade of mergers and acquisitions," Jifan Gao, chief executive officer of Changzhou, China-based Trina Solar Limited (NYSE ADR: TSL), told Bloomberg News. "From now until 2015 is the first phase, when about two-thirds of the players will be shaken out."
The Macquarie Group Limited (PINK ADR: MQBKY) agrees. In a recent report the Australia-based research firm said consolidation would claim 66% of the world's solar companies. Macquarie predicts that only four out of 35 solar companies in China will survive the next three years.
But in the aftermath of the carnage, the surviving solar companies will emerge stronger and in prime position to make the most of an exploding market.
In fact, the solar market has grown in 2011, but because capacity has exceeded demand, prices have continued to fall.
A Growing Market
According to the Solar Energy Industries Association, solar is the fastest-growing energy sector in the United States. The group says solar panel installations in June were up 69% over the previous year.
That pace of growth is expected to continue for an industry that supplies just 1% of the electricity in the United States. The U.S. Energy Information Agency projects installed solar energy capacity to increase 20 to 40 times 2010 levels over the next decade.
The primary reason for such optimism is the same reason the industry is suffering – falling prices that make solar competitive with traditional sources of energy like coal, oil, and gas.
First Solar Inc. (Nasdaq: FSLR), for example, says the solar panels it makes now can produce electricity for 14 cents to 16 cents per kilowatt – still significantly above the average cost of electricity in the United States of 11.6 cents per kilowatt.
But the solar energy industry has steadily improved panel efficiency, and expects the advances to continue. First Solar says that by 2014 its panels will produce electricity for 10 cents to 12 cents per kilowatt.
"At that point, there's a tremendous amount of interest," First Solar spokesman Alan Bernheimer told USA Today.
But which companies will survive to reap the benefits of the golden days of solar?
The New Banking Fees That Are Silently Squeezing You
But while you were celebrating, banks got busy finding new ways to recoup that money.
Now they've implemented new, inconspicuous tactics to charge fees – ways so under-the-radar they haven't (yet) triggered damaging customer backlash.
"Banks tried the in-your-face fee with debit cards, and consumers said enough," Alex Matjanec, co-founder of MyBankTracker.com, told The New York Times. "What most people don't realize is that they have been adding new charges or taking fees that have always existed and increased them, or are making them harder to avoid."
So if you haven't paid close attention to your statements, or haven't been monitoring communication from your bank, you could be facing exorbitant new costs – just to keep banking in the same manner you have for years.
Your New Banking Fees
Bank of America was one of the last big banks to scrap plans for a monthly debit card fee. SunTrust Banks Inc. (NYSE: STI) and Regions Financial Corp. (NYSE: RF) had already ended their programs and reimbursed customers, while JPMorgan Chase & Co. (NYSE: JPM) and Wells Fargo & Co. (NYSE: WFC) cancelled program testing.
But that hasn't stopped them from looking for new ways to stick it to customers.
The most common charges banks have implemented or proposed include a monthly fee for personal checking accounts, cash wiring fees, ATM withdrawal charges, and higher payments to receive paper statements.
Some specific fees that banks have hoped to slip by you include:
These Two Emerging Markets Just Got A Lot More Enticing
With U.S. economic growth on the wane and the European Union (EU) on the brink of collapse, there's never been a better time to increase your exposure to emerging markets.
And two fast-growing developing economies just became a lot more enticing.
I'm talking about Colombia and South Korea – both of which just signed free trade agreements (FTAs) with the United States.
Both treaties date back to the last days of the Bush administration – when bilateral trade deals were fashionable – but had gotten hung up in Congress.
To some extent, free trade agreements merely deflect trade from other paths. However, since the EU has signed a trade deal with South Korea and is negotiating one with Colombia, there are both defensive and trade-building reasons for these deals.
South Korea is a trillion-dollar economy and one of the United States' most important trading partners, with two-way trade totaling $74 billion in 2008. And Colombia's potential as a trading partner is enhanced by its geographical position – close to both the East and West Coast U.S. markets.
Both countries are growing quite fast. In fact, Colombia is expected to clock growth of more than 5% in 2011 and 2012.
The Biggest Beneficiaries
The South Korean deal offers the most potential to U.S. exporters, as the deal is expected to add about $10 billion to U.S. exports and gross domestic product (GDP).
U.S. exporters of agricultural products, which are projected to double from their current $2.8 billion, will be the primary beneficiaries. However, U.S. auto manufacturers and banks will also have a chance to break into the market.
On the other side, Korean exporters of cars, trucks and computer equipment will benefit from better access to the U.S. market.
Colombia has a thriving agricultural sector, but U.S. meat exports should jump significantly. Pork exports, for example, are forecast to grow 72%. IT companies and chemicals producers also will gain improved access to the Colombian market. But the greatest potential will be unlocked in the heavy equipment sector, as Colombia races to develop its mineral resources.
Reduced sanitary inspection barriers will improve the trade flow both ways. That will increase demand for Colombian coffee and flowers. But the big breakthrough will be in Colombia's energy sector, as the country's oil is an increasingly important export to the United States.
Now let's take a look at some of the specific companies that will cash in on these deals.
Sector Watch: Five Stocks To Help You Fight Food Inflation Pain
Unless you've stocked up on enough food to hold you through next year, you won't be able to avoid the effects of food inflation.
And the price pain will continue.
Global food prices are expected to increase 4% next year, and could climb even higher on supply squeezes. Droughts and floods have disrupted global crop yields, meaning higher prices at both grocery stores and restaurants.
Food at home prices rose 6.2% in September from the previous year. Grocery stores were eating most of the price increases earlier in the year, somewhat insulating U.S. consumers, but recently that's begun to change.
"The era of grocers holding the line on retail-food cost increases is basically over," John Anderson, a senior economist at the Farm Bureau in Washington, told Bloomberg News.
Food away from home didn't rise as high as food at home, up a more modest 2.6%. That's the widest gap between the two price measures since 1990.
The faster rise in grocery store prices has led some restaurants to start boosting prices to catch up. They think consumers are less likely to be deterred by increases now that food at home costs more, too.
"If people go to the supermarket and see that the core items they're purchasing are on the rise, then they are less likely to be surprised if restaurants are raising prices as well," Jeffrey Bernstein, an analyst with Barclays Capital, told Bloomberg.
Many chains have tried to avoid changes, but the third-quarter's 8% surge in commodity prices has pushed some to their breaking point. Now popular eateries like McDonald's Corp. (NYSE: MCD) and Panera Bread Co. (Nasdaq: PNRA), which have already adjusted their menu prices this year, are considering more price hikes.
Since food companies and restaurants are charging more for their products, brands that are consumers' favorites are raking in profits. Higher prices have boosted the Consumer Staples Select Sect. SPDR exchange-traded fund (NYSEARCA: XLP) about 15% in the past two years, while the Standard & Poor's Supercomposite Restaurants Index has soared 64%.
This means now's the time for you to offset your bloated food budgets by hunting for the sector's most successful stocks.
Five Food Inflation Investments
Here are five food-related stocks positioned to grow along with food prices:
China Still Key for Investors Despite Slumping Stock Markets
Despite the recent downturn in China's stock market, investors need to remain focused on the profit-generating long-term growth potential of the Asian powerhouse.
Chinese exchange-traded funds (ETFs), a popular way for U.S. investors to dip their toes into the Chinese stock markets, are off an average of more than 21% for 2011. That's a big shift from 2010, when the average China fund gained 13%, or 2009, when the average gain was an eye-popping 64.5%.
Anthony Bolton, one of the United Kingdom's most respected fund managers, called the end of the third quarter "a brutal period for Asian markets – as difficult a time to be running money as I can remember."
Bolton's U.K.-based Fidelity China Special Solutions Fund dropped 28.9% in six months.
A recent bounce up from lows reached in October has some experts wondering if China's stock markets hit a bottom or if they might slip still lower, but in any case investors mustn't abandon China, said Money Morning Chief Investment Strategist Keith Fitz-Gerald.
"Long-term, you can't afford to be without Chinese stocks," Fitz-Gerald said. "Timing is not what you should be focused on. You need to be focused on growth, and who has the money."
Fitz-Gerald pointed to the debt-crippled economies of the United States and Europe.
"That's not where the money is," he said. "It's in the emerging economies like China."
Several factors have combined to rock the Chinese stock market this year. The Chinese government has attacked inflation by raising interest rates five times over the past 12 months, but at the cost of slowing economic growth.
Even so, the Chinese central bank has projected the country's gross domestic product (GDP) will grow at a 9.2% rate in 2011 and an 8.5% clip next year.
That's still more than triple the growth of the U.S. economy. The Philadelphia Fed's quarterly survey yesterday (Monday) lowered its projected U.S. GDP for 2012 to 2.4%.
Crop-Killing Drought to Push Food Inflation Even Higher
A drought affecting one-third of the lower 48 states has hurt several key food crops, driving up prices this year and assuring widespread food inflation well into 2012.
According to the National Climatic Data Center, the drought has caused more than $10 billion in losses to agriculture and cattle, a number it expects to keep rising as the drought continues.
Meteorologists blame the drought on a La Niña weather pattern expected to last at least through the winter.
Crops most affected include corn and peanuts. In addition, the lack of rain dried cattle grazing pastures to dust, which has translated to higher beef prices.
"Yes, we are going to see higher prices this Thanksgiving," Purdue University agricultural economist Corinne Alexander told The Atlantic.
The American Farm Bureau estimates that a Thanksgiving meal for 10 will cost 13% more this year than it did last year.
The U.S. economy already has inflationary pressure as a result of the stimulative policies of the U.S. Federal Reserve pumping it with hundreds of billions of dollars.
"Ultra-low interest rates and excess money supply growth are what's been driving inflation," said Money Morning Global Investing Strategist Martin Hutchinson. "They raise commodity prices, which over time feeds into inflation in general."
Now the drought is pushing food inflation higher than overall inflation.
The Consumer Price Index (CPI) in September was up 3.9% over the previous year, while the increase for food alone was up 4.7%. Over the past five years, world food costs have risen 68%.
Earlier in the year, grocery stores were eating most of the price increases, somewhat insulating U.S. consumers. But in recent months that's begun to change.
"The era of grocers holding the line on retail-food cost increases is basically over," John Anderson, a senior economist at the Farm Bureau in Washington, told Bloomberg News.
The Biggest Bites
Prices are going up the most dramatically in the categories of food most affected by the drought. Beef is up 10.1%, for instance.
With pastures drying up over the summer, many ranchers were forced to sell off cattle before they could reproduce. While that briefly increased the supply of beef, the current shortage of cattle – the U.S. herd was at a 38-year low this summer – is impacting prices.
The drought has caused the price of hay to skyrocket from $80 a ton to $200 a ton, which, because it's used as forage for farm animals, has contributed to a 10.2% spike in dairy prices.
EOG Resources Inc.(NYSE: EOG) Is Looking to Lead U.S. Oil Production
EOG Resources Inc. (NYSE: EOG) has undergone a massive change in its business model – and it's paying off astoundingly.
EOG Resources used to be known as a leader in natural gas exploration and production.
But low natural gas prices led to declining profits. In fact, the company lost $70.9 million in 2010's third quarter.
So it embraced a major production and technology change. EOG perfected horizontal drilling techniques to access shale rock formations trapping large reserves of oil – instead of reserves of gas, as many competitors were doing.
Now EOG has transformed from a leading gas drilling company to a major oil producer, increasing its liquid production last year by 49%.
With this new production model, EOG's profits are driven by high oil prices instead of depressed natural gas prices. The company just reported its third-quarter earnings and the results are astonishing – it turned a loss from the same quarter last year into a blowout earnings surprise this year. Net income hit $541 million.
The bottom-line growth helped the company's share price rally 20% since earnings were released Nov. 2.
By changing its focus to profitable oil production, EOG Resources is now a low-risk, high-reward energy stock, making it a "Buy" for investors looking to cash in on rising oil prices. (**)
EOG Resources Inc.: Unlocking Profits from Shale Oil
EOG Resources is one of the largest independent (non-integrated) U.S. oil and natural gas companies, with proven reserves in the United States, Canada, Trinidad, the United Kingdom, and China.
It's the largest oil producer in North Dakota's Bakken Shale, and the largest producer in the Eagle Ford Shale in South Texas. These two shale oil fields have played a key role in ramping up U.S. oil production over the past few years, with each having an estimated 4 billion barrels of recoverable reserves.
EOG's extensive operations in these fields have pushed its total liquid production to 130,000 barrels per day, and Chief Executive Officer Mark G. Papa said he expects to reach 200,000 barrels per day in 2012. That could make the company the second or third largest oil producer in the United States.